Why ZTO Express' IPO Has Failed To Sparkle

ZTO Express Inc ZTO, the largest U.S. IPO of a Chinese company since Alibaba Group Holding Ltd BABA, had a disappointing market debut on Thursday, closing down about 15 percent from its IPO price.

No company wants to start out by making a negative first impression on public investors. So, how does a company end up losing 15 percent of its value on its first day of trading?

IPO pricing is a complicated, difficult and fluid process. ZTO, for example, originally indicated it expected its IPO price to be in the $16.50 to $18.50 range. Ultimately, it opted for $19.50, a price that ended up overly optimistic.

The IPO price decision ultimately falls on the IPO underwriters, the bank or banks responsible for allocating the IPO shares. The underwriters’ goal is to raise as much money from the IPO as possible without over-pricing the stock.

Box Inc BOX CEO Aaron Levie has described the seemingly impossible position companies find themselves in when going public.

“If your stock shoots up, you left money on the table. If it drops, you screwed investors. If it’s flat, you’re boring,” Levie said.

Although none of those options seem particularly appealing, underwriters tend to err on the side of leaving money on the table and making investors happy. The average 2015 IPO stock closed up 32.3 percent from its IPO price on its first day of trading.

Unfortunately, it seems ZTO’s underwriters, led by Goldman Sachs Group Inc GS and Morgan Stanley MS, got a bit too greedy when they bumped ZTO’s IPO price to $19.50. The underwriters found enough demand for the IPO shares at that price, but there wasn’t enough demand remaining in the open market to support the price once the stock began trading.